Wholesale Change: UK Responds to the Single-Supplier Practice

The UK's Office of Fair Trading (OFT) published the results of a study that concluded that if pharma companies limit the number of suppliers they work with, they could increase costs to the National Health Service (NHS). The study also predicts that it might mean that some patients would have to wait longer to get their drugs.

The report comes in the wake of Pfizer's decision to use a single distributor to supply pharmacies with its products on a fee-for-service basis. Pfizer's rationale for this system was that closer control of the supply chain would minimize the opportunities for counterfeit products to reach patients. Since then, AstraZeneca has said that it will work with just two distributors starting in February.

Traditionally, the United Kingdom has had a number of medicines wholesalers who compete for business with pharmacies. While some of them have the same owners, there remains a healthy number of independent pharmacists who are free to choose which wholesaler they deal with. If drug companies tie up supply with specific wholesalers, these independents may now have to deal with several different distributors in order to get all the supplies they need.

The historical system involves pharma companies offering their drugs to wholesalers at a discount from the list price at which it is reimbursed under the Pharmaceutical Price Reimbursement Scheme (PPRS). This discount is typically 12.5 percent. The drugs will then be offered by the wholesalers to the pharmacy, again at a discount from the list price, normally about 10.5 percent, with that two-percentage-point difference representing the wholesaler's profit margin. The pharmacy is reimbursed by NHS, which then claws back some of its profits. In effect, this means that NHS pays less than list price for meds. But if the discounts offered by wholesalers are cut—as could happen if competition is reduced—then the profits the pharmacists make drop. And, thus, NHS would end up paying more for medicines—OFT estimates that each percentage-point reduction in discount would cost NHS £50 million.

Under the direct-to-pharmacy system, the arrangements are a little different. The manufacturer decides what price the pharmacist will pay for the products, and then pays a fee to the wholesaler for distributing them. OFT claims there is a "significant risk" that such DTP schemes will increase NHS costs, as the competition aspect of setting discounts to attract business from pharmacies is removed in the three-quarters-plus of all drugs where the only option is to dispense the branded product.

The government is currently renegotiating the way the PPRS works with pharma companies, and OFT believes it should change it in such a way that will safeguard the discounts that pharmacies currently receive.

Another concern for OFT is that using a sole distributor is a risk of poorer service for both pharmacists and patients: There would be little incentive for the wholesaler to improve its service as the pharmacists have no choice over where they go for their supplies.

OFT has decided not to launch a full-scale competition inquiry, but it believes that a method should be implemented that would prevent the NHS budget from being adversely affected. It has two suggestions: Either reduce PPRS list prices by an amount equivalent to the average discounts that pharmacies receive or have suppliers offer a minimum list-price discount to pharmacies. It prefers the former option because it offers greater transparency of the actual prices being paid by NHS. The agency also believes that the government should specify minimum service levels that distributors should offer pharmacies.

"We anticipate that manufacturers will share some of our concerns and note, in particular, that it is not in their long-term interests for there to be insufficient competition between distributors," the report says. "If more manufacturers do opt for exclusivity in distribution in such a way that competition in the sector is reduced significantly, future intervention by OFT may be necessary."

The Association of British Pharmaceutical Industry is already working with government on how medicines can be delivered to NHS with maximum efficiency as a part of the renegotiations of the PPRS. A spokesman for the organization says, "We believe that the whole business about how NHS gets its medicines in the broadest sense should be subject to discussion during those talks and be looked at more than just the money."

Sarah Houlton is Pharmaceutical Executive's global correspondent. She can be reached at sarah@owlmedia.co.uk